Sugar Prices Sour as Supplies Grow

Sugar prices sank to their lowest levels since June 2010 on Wednesday, as bumper harvests from key growers continue to flood the global market.

Prices in the $15 billion futures market have declined for much of the year as investors braced for record production in Brazil and Thailand, which together account for almost a third of world output.

Bullish traders got a reprieve in October, when worries about the reliability of those supplies gave sugar prices a lift. An October fire at the Brazilian port of Santos, which channels most of the sugar out of the world's No. 1 grower, spurred concerns about transportation gridlock. And an active typhoon season in the Pacific basin brought unseasonable rainfall to Thailand, delaying the sugar-cane harvest in the world's No. 2 exporter.

But the rally proved to be temporary. Sugar output is now catching up to analysts' optimistic forecasts.

Meanwhile, demand for the sweetener remains tame, traders say.

World sugar futures fell 0.4% on Wednesday to 15.89 cents a pound on ICE Futures U.S.

The rout in sugar prices, which are down 19% so far this year, is yet another example of how a surge of supplies has quashed once-booming commodities markets. Analysts attribute much of the rise in supplies to investments made by producers when prices were much higher.

Along with corn and wheat, sugar is one of the most heavily traded agricultural commodities, which generally have borne the brunt of the bust.

Once sugar cane is planted, it produces for several years, so farmers have little incentive to cut back on production even when prices are low. Cane must also be crushed soon after it is harvested, so it is difficult for mills to stockpile sugar until prices rebound.

Brazil is expected to produce 41.1 million metric tons of raw sugar this season, up 0.3% from the previous season, according to the International Sugar Organization, an industry group. That would mark two back-to-back record harvests.

Thailand is set to boost its harvest by 10% in the current crop year, to 11 million tons, according to the ISO.

"It's just too big a supply," said Mike Seery, president of Seery Futures, a brokerage and consulting firm in Plainfield, Ill. Mr. Seery placed bets that benefit from falling prices in the sugar market in early November when prices were above 18 cents a pound.

"I see no reason to get out of that" position, he said.

Mr. Seery sees futures falling as low as 12 cents a pound in the middle of next year as the global glut worsens.

Investors such as hedge funds boosted their bearish bets on sugar prices by two-thirds in the week ended Dec. 10, to 129,773 positions, according to the latest data from the U.S. Commodity Futures Trading Commission. In the aggregate, however, money managers are still expecting prices to rise.

Since that data was collected, prices have declined 4.4%, while the number of futures contracts outstanding has increased. That indicates that even more bearish bets have been added this week, traders said.

To be sure, some market experts believe sugar prices already reflect the abundance of global supplies, and are due for a bounce.

Lower prices will entice buyers, said Chris Narayanan, head of agricultural-commodities research at Société Générale in New York. He projects that sugar prices will average more than 18 cents in the first quarter of 2014.

"The bulk of the price decline is behind us," said Nick Brooks, head of global commodities research for ETF Securities, an exchange-traded-product provider. "Our view is that a large part of the increase in supply is now in the price."

Still, many investors believe prices have further to fall. Some point out that a strengthening dollar versus emerging-market currencies is likely to boost sugar exports even more as farmers in countries such as Brazil reap the foreign-exchange gains.

The dollar got a boost against the Brazilian real on Wednesday following the Federal Reserve's decision to trim its postcrisis monetary stimulus. In the year to date, the dollar is up 12% against the real. On Wednesday, one dollar bought 2.3271 real, according to CQG.

"You are not going to get around this glut in sugar," said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago. He forecasts that sugar prices will fall below 15 cents a pound in the first quarter.

"Unless you burn it or push it in the ocean, this glut is not going away," Mr. Smith said.

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